Question

Question 3

You are trying to value the stock of XYZ Corp. Total earnings for year 1 are forecasted to be $157 million. You know that the company plans on paying out 11% of its earnings in the form of dividends and 27% in the form of share repurchases each year, and that all of the growth in future earnings will be through retained earnings. The company's return on new investment is 15%, its cost of equity is 12% and it has 87 million shares outstanding. Given this information, estimate the current share price for XYZ Corp. Round your answer to two decimals (do not include the $-symbol in your answer).

Question 4

Copy of

You are trying to value the stock of Cowbell Inc. using a free cash flow model. The firm currently has 25 million shares outstanding, a market value of debt of $80 million and $25 million in excess cash. You have estimated the free cash flows for the next few years as shown in the table below. You also assume that free cash flows will grow at a rate of 3% each year after year 6. The weighted average cost of capital (WACC) is 12%. Given this information, what is the best estimate for the share price of Cowbell? Select one.

Year	1	2	3	4	5	6
Free Cash Flow (in $ million)	30.00	35.00	40.00	44.00	46.00	48.00

	I.	$14.95
	II.	$14.39
	III.	$15.39
	IV.	$17.60

Answer 1

Option 4 is the right choice.

Given,

Shares outstanding = 25 million

WACC = 12%

Perpetual growth rate = 3%

Year	1	2	3	4	5	6
FCF	30	35	40	44	46	48

Present Value n = FCFn/(1+WACC)^n

Discount Factor = 1/(1+WACC)^n

Present Value = FCFn * Discount Factor

where n = year

Terminal value(n) = FCFn*(1+perpetual growth rate))/(WACC-Perpetual growth rate)

Present Value of Terminal Value (n) = Terminal value(n) / (1+WACC)^n

Please refer below calculations with below formula,

Year	1	2	3	4	5	6
FCF	30	35	40	44	46	48
Discount Factor @ 12%	0.89	0.80	0.71	0.64	0.57	0.51
Present Value	26.79	27.90	28.47	27.96	26.10	24.32

Terminal Value 6 Year = (48 * (1+3%)) / (12%-3%) = 549.33

Present Value of Terminal Value 6 Year = Terminal Value 6 Year / (1+12%)^6 = 278.31

Sum of Present Values = 26.79 + 27.90 + 28.47 + 27.96 + 26.10 + 24.32 = 161.54

Present Value of FCF = 161.54 + 278.31 = 439.85 millions

Cowbell Share Price = Present Value of FCF / Shares outstanding

Cowbell Share Price = 439.85 / 25

Cowbell Share Price = 17.59